Operating / Replacement Reserves
Reserves are capital set aside each year for future repairs and replacements — roofs, systems, surfacing, turnover. Underwriting NOI before reserves overstates yield.
Reserves (replacement or capital reserves) are money set aside each year to fund future repairs and replacements — roofs, HVAC and systems, parking/surfacing, fencing, and unit turnover. They're a real, recurring cost of ownership even though they're lumpy in timing.
Why it matters: how you treat reserves quietly drives the headline. Pre-reserves NOI (NOI before the reserve deduction) is higher, which inflates the cap rate and valuation — a favorite of the broker presentation. Post-reserves NOI reflects what you actually keep and is the honest basis for the true cap rate and DSCR.
The right discipline is to show both, and underwrite to the post-reserves number. UpsideIQ keeps pre- and post-reserves NOI explicit on every deal so the reserve haircut is never hidden.
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